Dematerialisation (or Demat) signifies the conversion of a share certificate from its present physical form to electronic form for the same number of holdings.
It is a direct application of scope provided by the tremendous progress made in the area of Information Technology, whereby voluminous and cumbersome paper work involved in the scrip based system is eliminated.
It offers scope for paperless trading through state-of-the-art technology, whereby share transactions and transfers are processed electronically without involving any share certificate or transfer deed after the share certificates have been converted from physical to electronic form.
Demat attempts to avoid the time consuming and complex process of getting shares transferred in the name of buyers and also aims to shirk inherent problems of bad deliveries, delay in processing, fraudulent interception in postal transit, etc.
Dematerialisation of shares is optional and an investor can still hold shares in the physical form. However, he/she has to demat the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares, he/she will get delivery of the shares in demat form.
The Depositories Act, 1996 has been enacted to regulate the matters related and incidental to the operation of Depositories and demat operations. Two Depositories are in operation - National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).